Wednesday, October 16, 2013

Colin Hay wrote a nice piece on the SPERI (Sheffield Political Economy Research Institute) blog last week, about economists and the study of political economy, the gist of which was that political economy has drifted too far towards being a branch of economics, and has forgotten that politics shapes the economy. Hay argues that we need to get back to looking at the political economy as the result of political processes and choices, and that economic forces alone don't explain all that much, because these forces act within a context shaped by politics. This fits in with Colin's long-stated positions on the nature of social science and the political economy, and his suspicions of the 'imperatives' deriving from a certain view of how the economy works, a view usually interpreted by economists themselves on the basis of an approach that overstates the importance of rationality and equilibria. The economist Dani Rodrik has also made similar points, arguing that the overbearing position of economics in political economy has emptied the study of politics of what makes it interesting.

This came to mind in a discussion at LSE last Monday at a meeting on the crisis in Southern Europe. There was a feeling of exasperation in the room at the lack of political debate about the crisis in the South of the Eurozone. Southern Europeans are suffering a tremendous economic and political crisis and yet still to see any kind of coherent popular reaction, although the heavy defeats of governing parties in elections suggests a desire for change. This absence of debate and limited political contestation reflects in part the fact that all of the mainstream political parties and organizations have signed up to the European project and see it as a national imperative (that word again) to remain within the EU and EMU, and to do so on the terms set by the Troika and the EU's leading countries. This, despite the heavy cost being paid by Southern Europe's citizens in unemployment, reduced wages, cuts in services and higher taxes, none of which can be credibly claimed to have helped resolve the economic crisis.

The point I want to make here is a very basic one, drawing on Colin Hay's argument. 'There is no alternative' is an idea - a theory which justifies a particular course of action. There are of course lots of alternatives to current policy, even within the constraints of the bailout memoranda and the European Monetary Union's rule-book. But more importantly, these constraints themselves are modifiable. For example, the European Union demands that deficits return to 3 per cent of GDP and countries must demonstrate that they have a plan to achieve this. But countries could of course choose to implement the plan with varying degrees of commitment to the stated aim. The decision to implement fiscal contraction is based on an assessment of the available alternatives. To say there is no alternative is simply not true.

What is true is that some alternatives could well bring unpalatable, even disastrous consequences. For example, failure to implement agreed deficit-cutting measures could lead to investors taking fright and pushing up the spread on the Southern governments' bonds. Conceivably, this could create difficulties in funding government activities, maybe even force a default, or lead to cuts in other areas of spending. The debt ceiling crisis in the United States is an interesting analogy here, because although the threat of default is entirely driven by domestic politics, the logic of considering alternatives in the face of a funding squeeze is quite similar. And what emerges from the US crisis is... well, actually, there are alternatives to raising the debt ceiling. Nobody really wants to test them out, but the rapid approach of the deadline for the government running out of cash leads to much inventive searching for... alternatives.

So when Europeans claim there is no alternative to certain kinds of policies, what they really mean is that they do not wish to countenance the alternatives they can think of. This is an entirely different proposition. It may well be that Southern Europe is better off sticking to the Troika's plan than tearing up the European rulebook, but in the end that is a political choice, based on an assessment of a deeply uncertain set of circumstances, and on an assessment of whose interests need to be protected first. That's actually what politics is usually about.

The usefulness of a more 'political' political economy is in the consideration of a much broader set of feasible scenarios than economists are prepared to model. It is ridiculous to claim that western democracies have no choices. The idea that there is no alternative is an idea, and what we need to understand is the politics of how that idea has trumped all the other ideas. This is the case even if we accept the notion that countries such as those in Southern Europe are better off sticking with current policy - after all, the study of politics is often the study of lousy decisions with terrible consequences. It's time we returned to studying why some political ideas win and other lose, instead of assuming that politicians do what economists say they are able to do. That is not only a scholarly surrender - it also means we are giving up on understanding fully how the political economy works.